3 Unlawfulness - definitionIf a contract conflicts with the criminal law …… or with other important legal principles …… then the court may not give full effect to the contract …… or may even give it no effect at all3

4 Who makes the objection?If there is a clear illegality, the court itself must raise the point ……even if neither party wants this to happenBut usually one party is raising the point tactically …… as an excuse to escape the contract4

5 A matter of balance“Unlawfulness” is an objection based on public policyBut upholding commercial contracts is also a goal of policySo the court is often engaged in balancing different policies …… especially where the illegality is relatively trivial5

6 Effect of illegality? “Balancing” can be complexPossibilities solutions are:All remedies deniedSome are denied, eg severance of the illegal partRemedies on the contract are denied, but non-contractual remedies are allowed6

7 Which contracts are illegal?The list is long and disorderedDifferent writers organise it all differentlyNot everyone agrees on how to structure the casesBasic distinction: illegality by statute and at common law7

8 By statute / At common lawStatutory illegality is very wide-spread …… and I can only deal with general principlesCommon law illegality is more manageable …… but also more antiquated8

9 “Illegal” or “void” ??Some writers distinguish “illegal contracts” from “void contracts”But the distinction is not awfully clear …… and relates mostly to the finer points of the effects of illegalityI will refer to it briefly later9

10 Scheme of the lecturesIllegality at common law (with specific examples)Illegality by statute (mostly general principles)Effect: contractual remediesEffect: non-contractual remedies10

16 Corruption and tax evasionContracts involving fraud or corrupt payments are illegaleg Procuring election as City Marshall, by promising to hand over some of the fees a Marshall can collect (Mayor of Dublin v. Hayes (1876) 10 IRCL 226)16

17 Corruption: tax evasionMany taxes are defined so as to catch certain types of contracteg Income tax (employment)eg VAT (sale of goods)eg Stamp duty (sale of land)If the parties agree to mislead the tax authorities …… then the contract is illegal17

18 Example Lewis v. Squash Ireland [1983] ILRM 363Managing director of companyPart of his salary was officially recorded as “expenses”He later claimed for unfair dismissal from the companyBut as his employment contract was illegal, he had no rights18

21 Trading with the enemy Where the country is at war …… contracts with those voluntarily living in enemy territory are illegaleg Ross v. Shaw [1917] 2 IR 367 (contract with nationals of areas overrun by the enemy)21

22 4. Interference with the administration of justiceCommon law illegality4. Interference with the administration of justice22

23 Interference with the administration of justiceEssentially two categories:Preventing court actions which should occureg by corruptly abandoning a prosecutionEncouraging court actions which shouldn’t occureg by paying another’s costs23

24 Wrongly preventing actions1. Compromising crimeDropping a prosecution in return for money is illegalDitto hiding evidence, or agreeing not to disclose itBut the victim of a crime may accept “reasonable compensation” (Criminal Law Act 1997 s 8(1))24

25 Wrongly preventing actions2. Ousting the courts’ jurisdictionThe contract cannot bar access to the courts, or establish another tribunalProvision for arbitration is valid …… but an appeal will lie from the arbitrator to the courts (Scott v. Avery (1856) 10 ER 1121)25

26 Wrongly preventing actions3. Unfair advantage in bankruptcyIf a trader is bankrupt, their assets are to be divided equally between their creditorsAn agreement treating one creditor more favourably than the others is illegal26

29 Wrongly encouraging actionsHowever, these objections are today less urgent“No foal no fee” is not seen as intrinsically objectionablePeople should be allowed to litigate “reasonably stateable claims” (O’Keefe v. Scales [1998] 1 IRLM 393)29

30 The modern law 4 main areas of concern today: Contingency feesFee sharing agreementsAssignment of rights to litigateHeir-locator agreements30

31 1. Contingency feesLegislation prohibits lawyers from acting in return for a percentage of the damages won (Solicitors (Amendment) Act 1994 s 68(2))An agreement for payment only if the action is won makes the contract invalid (Attorneys’ and Solicitors’ Act 1870 s 11)31

32 1. Contingency feesHowever, an agreement to work “no win no fee” does not have criminal consequences, it simply renders the agreement invalidIn practice, much legal work (especially for personal injury litigation) is done that way32

33 2. Fee sharing agreementsAn agreement by a solicitor to share fees with a non-lawyer is professional misconduct …… and the agreement cannot be enforcedeg Mohamed v. Alaga [1999] EWCA Civ 171633

34 3. Assignment of a right to litigateAt common law, someone with a right to litigate may not transfer that right to another2 exceptions are now recognised:If you sell property and include connected rights to litigate;If the assignee has a legitimate commercial interest in the right34

35 4. Heir-locator agreementsWhere one party offers to help another to make a claim from a deceased person’s estate …… and contracts for payment out of the proceeds of the claim …… then the contract is unlawful and unenforceable35

36 Survival of the doctrineThe doctrine is an antique oneBut the Supreme Court have confirmed that it still applies today …… even if the estate claimed is outside Ireland(Fraser v. Buckle [1996] 2 IRLM 34, discussed by Capper (1997) 60 MLR 286)36

37 Example McElroy v. Flynn [1991] IRLM 294Offer to act for particular claimants in return for 25% of the proceedsCostello J held this to be caught by the heir-locator doctrine …… as the help went beyond mere sale of information relating to the claim37

39 Encouraging sexual immoralityThe case law is antique …… and some of it is overtaken by modern developments (eg the 15th amendment to the constitution, 1996)How much of it is still good law is very speculative39

41 1. ProstitutionThe older cases invalidate any contract concerning or encouraging prostitutioneg A contract to hire a carriage to a prostitute for use in her trade (Pearce v. Brooks (1866) LR 1 Ex 213)41

42 1. ProstitutionThe Oireachtas has specified in legislation which aspects of prostitution are illegal (Criminal Law (Sexual Offences) Act 1993)Arguably, the courts should go no further than the statute42

43 2. Decisions to marryAt common law, any contract intended to influence or restrict choice of marriage was invalideg A contract not to marry anyone but the other partyeg A contract to find the other party a husband43

44 2. Decisions to marry Exception at common law:An agreement by two parties to marry one another was valid …… provided both were at that point free to marryHowever, this action was abolished by statute (Family Law Act 1981 s 2)44

45 3. Contracts modifying the marriage obligationsContracts encouraging separation in the future are invalidSo a contract by a married couple providing for a possible future separation is invalid …… but an agreement reached on an actual separation is valid45

46 3. Contracts modifying the marriage obligationsIt has been held that a contract to secure a (foreign) divorce is unlawful (Dalton v. Dalton [1982] ILRM 418) …… but it is an open question what the courts would do today46

47 4. Cohabitation and sex outside marriageTraditionally, a contract was invalid if it encouraged sex outside marriage …… though not if it merely followed a period of cohabitation(eg man making provision for his illegitimate children, Reade v. Adams (1855) 2 Ir Jur NS 197)47

50 Restraint of trade Again, the common law rules are antiqueNonetheless, the common law rules remain in full force …… though there is also statutory provision against anti-competitive contracts (see Competition Act 1991)50

51 What is the doctrine?The doctrine invalidates contracts not to engage in tradeExceptions are allowed when a particular contract can be shown to be reasonable both from the parties’ point of view …… and from the public point of view51

52 When does the doctrine apply?The usual case is of an express contract not to tradeeg A contract by an apprentice not to compete with his/her masterBut some contracts only indirectly restrict tradeDoes the doctrine apply to them?52

53 Kerry Co-Op v. An Bord Bainne [1991] IRLM 851An Bord Bainne was a trade association for farming co-opsThere was no effective sanction to force co-ops to remain part of An BordA proposed rule change would penalise any co-ops who left itWas this change subject to the doctrine of restraint of trade?53

54 Kerry Co-Op v. An Bord Bainne [1991] IRLM 851The Supreme Court disagreed whether the doctrine applied: -McCarthy J said it did, but that the proposed rule change was reasonableO’Flaherty J said that the doctrine did not applyFinlay CJ expressed no opinion54

55 So the law is unclearBut it seems that the doctrine will not be applied to:-Minor exclusive dealing arrangements (Murphy v. O’Donovan [1939] IR 455)Promises by buyers of land not to trade on that land (Sibra Building v. Ladgrove [1998] 2 IR 589)55

56 What does the doctrine require?All restraints within the doctrine are invalid unless it can be shown that:-The restraint is reasonable as between the parties, andThe restraint was reasonable from the point of view of the public56

57 Example Macken v. O’Reilly [1979] IRLM 79The Equestrian Federation of Ireland changed its rules …… so that all their Irish members who competed abroad had to do so on Irish-bred horsesThe plaintiff, a show-jumper, complained that this was an unreasonable restrictionBut was there restraint of trade?57

58 Example Macken v. O’Reilly [1979] IRLM 79The Supreme Court thought this was reasonable:-As to the public interest, the Federation were legitimately seeking to protect the position of Irish horse breedersAs to the position between the parties, the plaintiff's sacrifice was considered relatively minor58

59 Burden of proofReasonableness as between the parties must be affirmatively proved (John Orr Ltd v. Orr [1987] IRLM 702)But (probably) the burden is reversed as to the public’s interest59

60 Restraint of trade - examples3 major examples of the doctrine at work:EmploymentSale of businessExclusive dealing contracts60

61 1. EmploymentAny substantial interference with freedom to work or freedom to trade may be within the doctrineIn these cases, most of the attention is on reasonableness as between the parties themselvesAppeals to the public interest are rarely successful61

62 Example Johnston v. Cliftonville FC [1984] NI 9A part-time professional footballer sought higher pay than was permitted under Irish League rulesMurray J held that restrictions on pay were an interference with a basic liberty …… without any plausible justification being advanced62

63 Music casesA string of cases on pop stars illustrate the concentration on reasonableness as between the partiesThe public interest is largely irrelevant …… and the emphasis is on the legitimate interests of both parties63

64 Example 1 Silverstone Records v. Mountfield [1993] EMLR 152Contract which absolutely restrained the group from performing for any other employer for 7 yearsVarious other clauses were unusually harshNeither the group nor their manager had much experience with contractsRestraint of trade found64

65 Example 2 Panayiotou v. Sony [1994] EMLR 229The singer was obliged to produce 8 albums over a 15-year periodBut the court emphasised that the length of the contract was a function of successThe singer was well advised throughout, and had negotiated activelyNo restraint found65

66 Music casesAll the cases emphasise that inexperienced performers are entitled to protection of their interests …… but also that, from the record company's point of view, the rare success has to pay for the many failures66

67 Ordinary employment casesAgain, in more ordinary cases, the court tries to identity the legitimate interests of employer and employee …… in order to balance the parties’ interests against each other67

69 2. Sale of a businessAgain, the court must balance the interests of the parties against each anotherSome restrictions on the seller’s business activities will be necessary(eg prohibitions on approaching former customers)… but the issue will often be how broad such clauses can be69

70 Example John Orr Ltd v. Orr [1987] IRLM 702Sale of a fabrics businessClause forbidding the seller from competing anywhere in the worldThis was held by Costello J to be unjustifiably broad …… but he restrained the seller from dealing with anyone who was already a customer of the buyer70

71 3. Exclusive dealing contractsUnder these contracts, one party agrees to buy all their requirements for certain types of products from the other party (or to sell only to them)The courts have never been very ready to strike such agreements down …… and today tend to defer to competition law in the matter71

72 Length of the tieThe main consideration today is the length of the tieSo an obligation on a petrol station to buy petrol only from one firm is valid if for 5 years (Continental Oil v. Moyhihan (1977) 111 ILTR 5) …… but not if for 21 years (Esso v. Harpers Garage [1968] AC 269)72

73 Foreign illegalityWhat if there is illegality under foreign law but not Irish law?Much depends on whether the contract was to be performed here or abroadAnother question is whether the foreign law can be seen as analogous to Irish laws73

74 Example 1 Lemenda Trading v. African Petroleum [1988] QB 448Contract to pay commissions to certain intermediaries involved in an oil supply contractThe commissions were not illegal by English law …… but were forbidden by Qatar in an attempt to curb corruptionThe right to the commissions was not enforceable in England74

75 Example 2 Stanhope v. Hospitals Trust (1936) Ir Jur Rep 25Sale of lottery ticketsTickets were sold in Natal and sent on to DublinHowever, when the organisers were told that lotteries were illegal in Natal, they refused to include the Natal tickets in the drawA ticket-seller from Durban sued75

76 Example 2 Stanhope v. Hospitals Trust (1936) Ir Jur Rep 25Fitzgibbon J held that:-The non-inclusion was wrong, as the lottery was to be held in Dublin, and was legal by Irish lawHowever, the damages could not include damages for injury to the ticket-seller’s business, as that business was illegal76

78 Express prohibitionSome types of transaction are specifically stated by statute to be illegaleg legislation on shop hoursContracts in contravention of such laws are always illegal …… unless the legislation states that they should not be so treated78

79 Implied prohibitionWhere a contract necessarily involves an act which statute has declared illegal …… then the contract is itself illegalHowever, the courts are reluctant to apply this where no illegal intent is proved79

80 Example 1 Namlooze Venootschap v. Dorset Manufacturing [1949] IR 203Action for the price of goods sold and deliveredThe price was payable in guilders …… but no official permission from the Minister for Finance had been sought, as statute then requiredThe contract was held illegal and unenforceable80

81 Example 2 Gavin Low Ltd v. Field [1942] IR 86Contract for sale of a cow carcassAfter delivery, the seller claimed the priceBut the carcass had already been condemned as unfit for human consumptionIt is illegal to offer such goods for saleBut the contract was still enforceable81

84 Effect of illegality - generalA contract illegal on its face is completely unenforceableIf one party has an illegal intent, they may be refused remediesAn illegal provision may be cut out of an otherwise lawful contractWe also need to ask whether other heads of the law (eg property, tort) can be relevant84

85 Illegality on the face of the contractA contract which is expressly for a purpose which is illegal cannot be enforced by either partyKnowledge of the relevant law is not required (‘ignorance of the law is no excuse’)85

86 Example Gray v. Cathcart (1899) 33 ILTR 35A landlord leased a house in poor conditionWhen the rent was not paid, the landlord suedBut letting unsanitary premises was contrary to statute ...… so the contract was illegal on its face, and the rent not recoverable86

87 Illegal intent or performanceIf a contract is legal on its face, butone or both sides intends to perform in an illegal way,or does in fact perform in an illegal waythen any party who acted or intended illegally is barred from remedies87

88 Example 1 Ashmore v. Dawson [1973] 1 WLR 828An engineering firm contracts with hauliers to move some heavy equipmentAs the hauliers know, the law requires the use of a more powerful lorry than they have availableThe hauliers cannot enforceWhether the engineers can enforce depends on their knowledge88

89 Example 2 Kavanagh v. Caulfield [2002] IEHC 67P agreed to buy premises from DAs part of the price, P was to pay £7,500 to “The Marion Work of Atonement”, said to be a charityIn fact, this additional payment was a tax dodgeBut it could not be shown that P knew of any illegalityTherefore P could enforce against D89

90 Example 3 Whitecross Potatoes v. Coyle [1978] IRLM 31A farmer in Meath contracts to sell potatoes to an English firmThey suspect that the UK government may soon introduce import restrictionsThey agree that if this happens, a higher price will be payableThe new restrictions are indeed introduced90

91 Example 3 Whitecross Potatoes v. Coyle [1978] IRLM 31What was intended by the parties?The buyer intended that the seller would supply from NI (lawful)The seller intended to smuggle his own potatoes into NI and supply them (unlawful)Therefore the buyer could enforce but the seller could not91

92 Separation of legal from illegal parts of the agreementA possible response to illegality is not to declare the entire arrangement illegal …… but simply to strike out the part which is illegal and leave the restThe law is confused and controversial92

93 Separation – two distinct ideasTwo distinct notions seem to be involved:If an agreement naturally falls into two or more parts, only one of which is illegal, there is no reason why the rest should not be enforceable93

94 Separation – two distinct ideasSome types of illegality are inherently trivial, and so should not result in the illegality of the entire contract …… so the contract is valid, but the objectionable term is “void”eg terms ousting the courts’ jurisdictioneg terms in restraint of trade94

95 Example 1 Murphy v. Crean [1915] 1 IR 111Lease of pub premisesIllegal term (that the tenant would transfer the licence as directed by the landlord)The landlord tried to enforce other clauses of the leaseBut the entire contract was held unenforceable95

96 Example 2 McIlvenna v. Ferris [1955] IR 318Contract for building workUnder Emergency Powers legislation, such work could not be done without a licenceThe contract was accordingly held illegal …… except for part of the work done after the legislation was revoked96

98 Other principles of lawWhere a claim on an illegal contract is not permitted …… the plaintiff may consider invoking some other head of the lawBut the court will need to ask whether the illegality equally bars action under that other head of the law98

99 Other principles: 1. PropertyPlaintiff are entitled to claim property belonging to them, even if there is evidence of illegality connected with itPerhaps surprisingly, an illegal contract may still pass ownership just as if it were valid99

100 Example Bowmakers v. Barnet Instruments [1945] KB 65Sale of machine tools on H-P termsThe contracts infringed anti-inflation legislation, and so could not be enforcedWhen buyers defaulted, sellers claimed the tools backOwnership was determined by reference to the illegal contracts100

101 An exception? Bowmakers involved a rather technical type of illegalityPerhaps a different attitude will be taken to more flagrant illegalityeg ownership of goods it is illegal for anyone to owneg ownership of bribe money (Brady v. Flood (1841) 6 Ct Rep Ir 309)101

102 Other principles: 2. FraudWhere one party to the contract has committed fraud on the other, an action may lie in deceit …… even if the contract is illegalThis approach will only succeed if the illegality seems relatively trivial (eg Saunders v. Edwards [1987] 2 AER 651)102

103 Other principles: 3. RestitutionSuppose one side transfers money or other property to the other under the contract …… but later seeks to recover itThis would involve the court helping a party to an illegal contract …… but helping them to unravel the contract, not to perform it103

104 Other principles: 3. RestitutionThe basic principle is:-“In pari delicto, potior est conditio defendentis”=“When both sides are equally guilty, the defendant’s case is the stronger of the two”But when are both parties “equally guilty”?104

105 The guiltless plaintiffA plaintiff is not caught by this rule if s/he is entirely innocent of any illegality …… or has repented of any illegality …… or was the victim of fraud or oppression by the other party …… or was one of a class that the legislation was meant to protect105

106 The innocent plaintiffA plaintiff who does not know the facts rendering the transaction illegal may be able to recover money paideg Insuring an enemy cargo in ignorance of the declaration of war (Oom v. Bruce (1810) 12 East 225)The other party’s guilt or innocence appears to be irrelevant106

107 The repentant plaintiffWhere the plaintiff transfers money or property with unlawful intent …… but the plaintiff thinks better of the scheme before anything illegal is done …… then the plaintiff may recover back the money or property107

108 The repentant plaintiffAt one time, the courts required genuine penitence …… and would refuse a remedy if no remorse was shownToday, the approach is more pragmaticRecovery is permitted so that there is an incentive to withdraw before any crime is actually committed108

109 Example Tribe v. Tribe [1995] 4 AER 236A father transferred shares to his son, apparently on saleIn fact, the purpose was to prevent the shares falling into the hands of the father’s creditorsThe father made a satisfactory arrangement with his creditors …… and successfully claimed the shares back109

110 Fraud or oppression Where money or property was obtained by fraud …… the defrauded party may recover it back despite any illegalityeg where P is tricked into entering an illegal insurance contract (Hughes v. Liverpool Victoria [1916] 2 KB 482)110

111 Protected classWhere the object of legislation is to protect people in P’s position …… then the courts will be slow to say that breach of the legislation bars P from a remedyThe statute is to be read in the light of its objects111

112 Example Kiriri Cotton v. Dewani [1960] AC 192Legislation made it illegal for a landlord to demand “key money” from tenantsA tenant nonetheless paid this money on taking a leaseBecause the object of the legislation was to protect tenants …… the tenant was able to claim the money back from the landlord112